STAFF REPORT TO THE CITY COUNCIL
DATE: Special Meeting of October 19, 2021
TO: Members of the City Council
VIA: Dante Hall, City Manager
SUBMITTED BY: Michael Roberts, Public Works Director/City Engineer SUBJECT: Continued Discussion Regarding Santa Clara Valley Housing Group's (SCVHG) Request to form a Mello-Roos Community Facilities District for the Hilltown Development
RECOMMENDED ACTION:
Staff recommends the City Council receive a presentation from SCHG (Att #1), discuss their request to form a Mello-Roos Community Facilities District (CFD) for Hilltown, and provide direction to staff, if any.
FISCAL IMPACT OF RECOMMENDATION:
There is no cost associated with receiving this report.
SUMMARY:
The Hill Town Project is an approved but not yet constructed mixed-use project on a 44.2-acre site to consist of up to 598 residential dwelling units and approximately 4,200 square feet of neighborhood commercial uses. The site is located at 4200 San Pablo Avenue, which is bounded by John Muir Parkway, San Pablo Avenue, and Interstate 80. On September 14, 2021, City Council approved a minor subdivision dividing the site into 4 separate parcels to allow the development to be constructed in phases.
In May the Developer, SCHG, provided Council a project update (Att #1) and made a presentation requesting the City form a Mello-Roos CFD (Att #2). According to SCHG, the site is especially challenging (Att #3) and expensive to develop, with the first phase alone costing $38M (Att #4).
SCHG indicated the upfront cost was too high to obtain private financing, and without the formation of a Mello-Roos CFD, the development will not be able to proceed.
A Mello-Roos CFD, which is an entity formed by a City, has the advantage of being able to issue low-interest, tax-exempt bonds to finance eligible public facilities and services necessary to serve the new development. The indebtedness incurred is repaid through special taxes that are levied within the district and are paid at the same time as ad valorem taxes. Examples of eligible facilities for Hilltown include grading; public infrastructure including parks, utilities, streets and associated improvements; and payment of impact fees. Eligible services could include police services, recreation program services, and maintenance and operation of storm protection services.
Whether or not to form a Mello-Roose Community Facilities District, including the amount and facilities/services to be financed, is a negotiation between the City and SCHG. SCHG has provided a preliminary engineer's estimate indicating the Hilltown development could qualify for up to $51.6M in Mello-Roos infrastructure costs (Att #5). They also provided scenarios for different special tax amounts, which vary from $3,640 to $5,700 per year, in addition to the current ad valorem amount (Att #6). It should be clarified that the special tax amounts shown are for illustrative purposes only. The special tax amount is based upon the amount financed, which is not stated, and is a function of the annual bond payments, interest rate on the bonds, bond counsel, other administrative costs, and apportionment of the debt between parcels. '
Given the intention of this Special Meeting - to provide City Council the forum for a focused discussion with SCHG - City staff posed additional questions to SCHG to inform the discussion.
SCHG provided responses which have been edited by staff for clarity as follows:
2& A
Why does a Mello-Roos CFD (community facilities district) need to be formed? SCHG: A CFD does not "NEED" to be created. In the Hercules Hilltown Development case, the extremely challenging site and the other public improvements and fees are so expensive that if the development must pay all these costs, the project would not be financially feasible. The public improvements and impact fees would exceed the cost of the land.
The Mello- Roos CFD Act of 1978 was enacted not for the benefit of home builders. It was enacted for the benefit of Municipalities by helping them to secure new Tax Revenues for continued growth after the passage of Proposition 13 in 1978. Prop 13 eliminated a municipality's ability to increase the "MIL" or property tax without a vote of the citizens. Pre Prop 13, cities and school boards etc. could increase the "MIL" by a small amount, 1/8 of a cent for example, to generate tax dollars to construct roads, sidewalks, libraries, fire stations, water systems and sewer systems, parks, schools, any public improvements or "community facilities". Post Prop 13 Municipalities needed a way to continue to grow, and the Mello- Roos CFD Act was passed. It has become even more critical to cities in the last few decades as impact fees have increased, a severe housing shortage has developed, and city revenues have declined. Without a way to get public improvements financed and built, a new revenue source mechanism had to be legislated for municipalities to grow. 1 Staff notes that an estimate of a Mello-Roos annual cost amount is usually derived by estimating the interest rate on the bonds, the annual bond payments, and then how that amount would be divided between the properties. The increased tax would be related to the bond payments, rather than the property value.
How much financing is needed?
SCVHG: With Mello-Roos CFD financing, the list of public improvements and impact fees n almost all cases exceed what can be generated with Mello-Roos taxes. The amount and hat is financed is a negotiation
What will be the financial impact to the new property owners in addition to existing taxes? SCHVG: The owners of the new homes will have a higher total tax bill than a similar priced older home.
What can Mello-Roos finance?
SCVHG: Certain public improvements, impact fees and other public services and facilities costs associated with the new growth.
What is the public benefit of the Mello-Roos?
SCHG: The public benefit for a Mello-Roos for the Hill Town Project is the transformation of an underutilized, marque site in the middle of Hercules. Approving a Mello-Roos allows the development to move forward which will offer 400 townhomes for ownership, 193 apartments/condos for rent/sale, and a myriad of public benefits including the construction of multiple parks, new traffic signal on San Pablo, and a new sidewalk connecting from the top of San Pablo to the new Safeway, among other benefits.
What are the risks to the city?
SCVHG: There is very little financial risk to the city. Recourse for the Bondholders is to the land and homes. There is some level of "headline" risk if a Mello Roos CFD defaults, but it does not impact the City's financial position. A market absorption study will be required There is no impact to the city's credit rating and the bonds are unrated. The City's ability to utilize its own General and Enterprise Funds is not impacted.
What are the alternatives to Mello-Roos and why are they inferior? SCHG: There is not really any alternative except have the development pay the entire cost of public improvements. Sometimes Assessment Act Bonds can be used for certain public improvements, and placed on the tax bill, similar to Mello-Roos, but it is much less flexible and may be required to be paid out of the general fund.